Weddings are the theme this weekend at Fuller Lowenberg & Co. CPAs. Our own Ryan Rao, CPA is tying the knot this weekend! Congratulations to Ryan & Jackie!
Ryan was asked to produce an article just for this occasion…
While there are countless reasons and similarities as to why a couple may decide to come together and eventually get married, worries and burdens related to finances have consistently been holding one of top spots for divorce over the years. Perhaps instead of trying to find the perfect chocolate mousse filling for their wedding cake, future newlyweds should focus more attention on finding the perfect accountant. While many look at marriage as a sentence, it could turn into a windfall when April 15th rolls around. Take it from a CPA who is only a few short days away from ending his lifelong streak of being a bachelor; there are several tax benefits to tying the knot as long as you are aware of them and know how to plan for them.
A common misconception of having the ability to claim “Married Filing Joint” as your filing status on your tax return is that you need to be married for the majority or all of the tax year you’re filing. But in fact it is based upon your status on the last day of the calendar year. So if you and your fiancé decide to have a wonderful New Year’s Eve Wedding and take the plunge before the clock strikes 12:00 on December 31st, congratulations you can file your tax return with a married status.
The Marriage Penalty?
Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001, the “marriage penalty” was known for the simple fact that the standard deduction for married couples was less than the deduction of two single taxpayer deductions. Now since 2001, the joint tax bills for married taxpayers remains closer to the combined tax liability they would have owed if still single. A marriage penalty can still exist when escalating into the higher tax brackets but if a joint couple has significantly different incomes, the lower one can usually balance out the higher one and pull themselves into a lower bracket. For 2015, the standard deduction for an individual taxpayer will be $6,300 and the standard deduction for married taxpayers will be $12,600, exactly twice the single amount.
Buying a home is an expensive, demanding, yet smart investment. And the IRS tries to tax you on this investment when you sell it by attaching a capital gains tax on any profit you make from the sale. By qualifying your home as a long-term investment, one can be protected from the capital gains tax. As long as you pass the time and residency test of two of the past five years of owning and using it as a principal residence, you have qualified. As a single person, you’re allowed to recognize up to $250,000 in profit from the sale of your home tax-free. However, if you are married, you can recognize up to $500,000. Only one spouse has to own the house as long as both lived in it during the qualifying period, married or not at the time.
While an IRA is typically regarded as an “individual” retirement account, a spouse can contribute to one with their spouse even if they are not currently employed and secure the benefits of a greater deduction on their federal income tax return. While filing jointly, you and your spouse can each make a tax deductible contribution to a traditional IRA even if only one of you is employed. A taxpayer can potentially deduct up to $5,500, $11,000 jointly, of IRA contributions.
Estate & Gift Tax
While losing your spouse will of course be a burdensome, sorrow moment in your life, the IRS makes it beneficial for you to have been married at the date of death. The federal estate tax exclusion for 2015 is $5,430,000. Which means unless you are a wealthy individual whose estate will be valued greater than that at date of death, no estate tax return is required. However if you do happen to be leaving a sizable inheritance, an unlimited amount can be transferred to your spouse without paying a dime in federal estate tax.
A similar benefit also is applied when it comes to the gift tax. Annually an individual can gift up to $14,000 to someone tax-free. But spouses can gift an unlimited amount to each other without a tax consequence. Not only is the spouse-to-spouse exchange unlimited, any gift given automatically is considered a joint gift from a married couple and the limit is increased to $28,000 per recipient.
Supreme Court Ruling: Obergefell v Hodges
Prior to the June 26, 2015 Supreme Court Ruling, Individual state rights regarding same-sex marriage throughout the 50 states differed from one to the next. However the Obergefell v Hodges decision redefined marriage and overruled the states’ rights, legalizing same-sex marriage at the federal and state levels throughout the United States. This decision now requires all legally-married same -sex couples to file both their federal and state returns with a married status, jointly or separately.
Therefore, all extended 2014 and future year tax returns will be prepared with one of the married filing statuses. When it comes to previously filed returns and state tax implications, the following items need to be considered:
• In those states where same-sex marriage was not previously recognized but a couple was married, they now have the opportunity to go back and amend those state returns with a married filing status and recalculate the tax.
• For any refunds received on amended state returns, these need to be claimed as income on the next federal income tax return.
• State income tax withholding on paychecks should be adjusted to claim married.
The 2015 tax year brings more benefits and value to being married than ever. So I beg the question, aside from all of the clear-cut tax benefits previously mentioned, logistically wouldn’t it just be easier to deal with one tax return over two?
By Ryan Rao, CPA